The Australian Government moves to start investing in vocational education and training

The Australian Government looks like it is about to start investing in vocational education and training (VET) again. It’s about time.

It’s also important to examine some recent history. Last July, Malcolm Turnbull’s Coalition ran its election campaign under the slogan “jobs and growth”, although announced no new training policies or programs. Instead, it promoted a $48 billion tax cut for business, part of which has partially been approved by Parliament.

In June of last year, Monash Business School and the Economic Society of Australia (ESA) polled the ESA National Economic Panel for their opinion on this proposition: “Australia will receive a bigger economic growth dividend in the long-run by spending on education than offering an equivalent amount of money on a tax cut to business.”

Economists are famously not the most left-leaning group of professionals, but their responses to this question – while not uniform – were overwhelming: almost two-thirds of the panel (19 of 30) “agreed” or “strongly agreed” with the statement, with only 6 economists disagreeing and 4 “uncertain”. Comments included:

Bruce Chapman: “Literacy and numeracy skills of the population are the most important contributors to long-run growth. So long as the additional education contributes importantly to these capacities there should be little doubt that expenditure in this area is of the most critical significance.”

Chris Edmond: “Business tax cuts offer a ‘one-off’ level effect and so has no long-run growth dividend at all, while investment in education has a very real prospect of increasing the growth rate of real GDP over an extended period.”

James Morely: “Estimates on returns to education are larger and more precise than estimates on the effects of tax cuts on investment and long-run growth.”

John Quiggin: “Social and private returns to education are higher than marginal returns to business investment.”

One of those who disagreed – Professor Rodney Maddock (who will be speaking at Community Colleges Australia’s Annual Conference in Melbourne in July) – cautioned that, “I do not expect any payoff from increased educational spending unless there are very significant reforms to the system.” In other words, it’s not just about investment, but also about how the system uses that investment.

Much of Australia’s low-hanging fruit has been picked when it comes to economic reform. We’ve floated the dollar, privatised the banks, deregulated the labour market. There’s less obvious work for government to do to reform the economy. But if I had to nominate the remaining lowest-hanging fruit, it’s spending money to help disadvantaged students get the best out of their education. Kids from low socioeconomic backgrounds are our greatest untapped source of potential growth. They are our most undervalued stock.

Irvine’s prescription:

Want to innovate? Educate. Want to create the jobs of the future? Educate. Want more tax revenue? Educate. Investments in our human capital offer the best returns around.

The relationship between educational attainment and growth and income is a given. The more skilled and educated a workforce, the better off is the economy and the population. The consequences for countries with a poorly trained workforce are devastating. Australia saw this just prior to the global financial crisis in 2007-08 when the economy ran out of suitably educated people. The “skills shortage”, as it became known, meant that rapidly expanding companies could not find the people needed to work in their bigger and better businesses.

In the period from the end of 2005 to the start of 2009, unemployment hovered around a 30-year low at between 4-5%. In human terms this was around 450,000 to 500,000 people. None of these half a million people had the skills required in a strong economy, so businesses had to resort to hiring foreign workers. While this was appropriate at that time of unforeseen economic strength, it overlooked the issue that the education and training system allowed 450,000 people in the workforce to remain unemployed despite the unprecedented demand for labour.

Fast forward just 11 months to April 2017: The ABC recently reported that the “May budget will establish a training fund worth $300 million, funded by visa charges. This will sit alongside a bigger focus on vocational and non-university skills training.” This announcement is set in the context of abolishing the “457 temporary work visas” and introducing new language and skills testing for foreigners who seek to work in Australia.

So investing in vocational education and training appears to be on the Coalition’s agenda, although (apparently) tied to new immigration rules. Next week’s budget will reveal how much.